Frequently Asked Questions
While Million's Insurance Agency has taken care to ensure that the FAQ information is accurate, such information cannot be interpreted as changing the scope of the insurance terms and conditions of the applicable policy contract in effect with any insured. A policy can only be changed by the underwriter through a change in coverage forms, endorsement to the policy contract or amendment to the policyholder's certificate of insurance. The underwriting rules issued by the company may change from time to time which may affect the questions and answers that follow. Coverages may differ in some states.
Do privately-held companies need D&O insurance?
Due to the ownership structure of most private venture backed companies, the risk for securities litigation is reduced substantially. As such, D&O rates for private firms are roughly one fifth the cost of their public counterparts. The largest areas of securities-based risk may be in merger-related activities and stock repurchases from founders or key executives. Additionally, employment practices related litigation (EPL) now represents over 25% of all lawsuits against directors and officers. For many rapid growth companies, strong human resources practices and procedures may not yet be in place which can increase the probability of litigation. Other areas of litigation may include intellectual property disputes, particularly if your industry has key technical employees moving between competitors. This type of litigation frequently names the directors or officers in recruiting the individual and soliciting trade secrets.
Today, D&O policies can be structured to provide protection against exposures private companies face. These provision include entity coverage for both securities and EPL claims with average corporate retentions (deductibles) ranging from $25,000 - $75,000. Premiums are frequently under $10,000 for a $1 million limit of liability. Stand alone EPL policies are also available, often at competitive costs with lower retentions. EPL policies do not cover the other exposures discussed.
How much insurance do we need?
Public companies usually determine the desired amount of D&O insurance through an analysis of several factors. These include statistics on judgments and settlements in securities class action cases in their industry, the company's market capitalization, the amount of D&O insurance purchased by similar companies, and special risk factors that are unique to the company. Some brokers will provide you with various statistical and other tools to assist you with your evaluation process.
What is allocation?
Most securities lawsuits name both the corporate entity and the directors and officers of the entity. However, D&O insurance policies do not always consider the entity an insured party under the contract. Therefore, any defense and settlement costs which are deemed attributable to the corporate entity are not insured. This becomes problematic as: 1) defense counsel typically represents both parties and; 2) most cases settle, making it difficult to attribute defense and settlement costs between the two defendants. The result had been a great deal of litigation between clients and D&O insurance providers over what portion of the defense and settlement costs are attributable to the company and therefore uninsured.
There have been three major recent court decisions regarding allocation, all favorable to the insured rather than to the insurance carrier. As a result of these decisions, most carriers now establish a fixed allocation among covered and non-covered parties without regard to the merits of the securities-related claim. Most D&O insurers also offer entity coverage, which means that the company's own liability will be covered even if the individual directors and officers are dropped from the lawsuit. The industry has changed so rapidly that now insurers often provide entity coverage as part of their standard terms and as part of their initial quotations
The principal risk of this trend is that coverage will be exhausted quicker due to the higher payout. With entity coverage, a bankruptcy court could considered the D&O policy an asset of the company and therefore unavailable to the individual insureds. Further fixed allocation has largely been limited to securities litigation, which leaves other types of D&O claims still subject to allocation negotiations. A few carriers even incorporate the "relative exposure" rule into their policy for non-securities claims which is unfavorable to the insured. Currently, AIG and Lloyd's of London are the only carriers that offer fixed allocation for non-securities lawsuits. None of the carriers address allocation between insured and uninsured activities which are often left gray when lawsuits settle and facts remain unclear.